For buy-side firms, swap execution facilities represent a new paradigm for OTC trading, one that they’re not yet fully embracing but which is nevertheless the object of substantial interest.
At several conferences over the past six to nine months, a hot topic of conversation has been electronic trading in general and SEFs in particular, according to John Griffin, senior risk manager at The Hartford Investment Management Co. (Himco).
“Some people feel liquidity on SEFs hasn’t been what they expected it to be. But trading volumes have been down in general, so it might not have been the ideal market environment during which to gauge the SEFs' success,” Griffin told Markets Media.
Mandatory clearing began in March 2013 for Category 1 users and added others in June and September, with SEFs following in mid- and late-February for interest rate and credit default swaps, respectively.
“I believe that most buy-side firms that needed to be ready in order to avoid any interruptions to trading were probably able to do so on time,” said Griffin. “Firms that weren’t ready probably were not as dependent on the utilization of derivatives in their portfolio management strategies, so it wasn't their top priority to go live on day 1. They may have been waiting for some of the dust to settle, to see how the landscape evolved and determine who they wanted to partner with.”
Himco is symbolic of how many asset managers handled the transition to clearinghouses and SEFs, said Griffin, with a cross functional project team that was focused on preparing for the mandatory deadlines and ensuring operational readiness. “Once live, then you are continually trying to evolve how you’re processing trades to be more efficient,” he said.
Trade reconstruction requirements mandated by the Commodity Futures Trading Commission are having an impact on swap dealers and major swap participants.
The requirements stem from the Dodd-Frank Act and are implemented in rules adopted by the CFTC, in particular CFTC 1.35(a), which requires firms to produce a time-sequenced reconstruction of a swap, from the initial pre-trade communications through to the expiration of the swap, within 72 hours of a CFTC request. In order to do this, firms need to maintain daily trading records of swaps and all related records including communications, such as e-mail, instant messages, and recorded phone calls.
“The record-keeping aspect of reform was a big concern to everybody in terms of having the capability to fulfill those obligations,” said Chris Amen, head of U. S. institutional rates markets at Tradeweb. “Our clients, for the most part, have gotten more comfortable with that issue.”
In terms of reconstructing trades, Tradeweb automates the entire workflow process. “We can instantaneously provide clients with snapshots of where the markets were when they log in, what their trading straight through the execution, and post-trade reports,” Amen said. “Our clients literally call us, and in a matter of minutes, have the full order report to the extent that they need it.”
Given that the industry is only about four months into SEFs, it's probably too soon to be judging the overall effectiveness and impact to the markets “We’ve heard positive things about there being good liquidity for the credit indices with tight spreads but not as much depth as traders might like to be able to access,” Griffin said. “No surprise there. So it seems to be working reasonably well all things considered. Investors are slowly getting used to the transition but the fact remains that you now have to in many cases reach for the keyboard instead of picking up the phone to execute that trade.”
